Karstadt's Profitability

Der Spiegel informs us that Karstadt managed to be profitable during the 6 months ending 3/09:

"Bittere Ironie für die Beschäftigten bei Karstadt: Im Halbjahr vor der Insolvenz haben die Warenhäuser des bankrotten Arcandor-Konzerns wieder einen Betriebsgewinn erwirtschaftet."

Further down in the article, we learn that they are talking about an impressive "operating profit" of 7 m €, as compared to an operating loss of 272 m € during the last full financial year (ending 9/08).

This makes it sound like Karstadt isn't a basket case after all, and with a little bit more patience, an insolvency could have been avoided (or why else would they use the phrase "bitter irony"?).

Nothing could be more wrong:

- First of all, Karstadt is only one part of Arcandor's retail empire. The mail order business apparently made an operating loss of 57 m €.

- Then there's the important detail that the last 6 months included the christmas shopping seasons, so obviously they are better for a retailer than the full 12 months. Not mentioned at all in the article.

- More importantly, this is "operating profit" only. Counterchecking the 272 m € in the Arcandor accounts, it seems that Spiegel is quoting EBIT. Now EBIT is obviously before interest, and Karstadt's segmental debts are 900 m €. Assuming only 6 % annual interest, the 6 month interest charge on this debt would be 27 m €, turning 7 m € profit into a 20 m € loss. And of course Arcandor's total debt is a staggering 13 bn €, so allocating a mere 900 m € to Karstadt means that most of Arcandor's debt isn't allocated to any segment. But it still needs to be serviced if Arcandor continues without restructuring.

- Last year, combined EBIT of all segments was -165 m € (of which -272 m € Karstadt, i.e. the rest of Arcandor excluding Karstadt had a positive EBIT). Yet Arcandor overall posted a net loss of 745 m €, and equity dropped by nearly 1.3 bn €. This divergence makes it very clear that it's totally useless to focus on EBIT.

- And let's not forget that Arcandor allegedly lost a cool 500 m € during those same 6 months when Karstadt achieved its 7 m € operating profit.

In short, it's rather bizarre to argue that a modest "operating profit" of 7 m € at Karstadt shows that Arcandor is on the mend. No, quite the opposite is true: If Karstadt cannot do much much better than that, there is absolutely no way that Arcandor's debt can ever be serviced, and that is exactly the reason why Arcandor had to enter insolvency proceedings.